Bitcoin-Powered Lending With BTCJam and Bitbond
We are fortunate to presently be witnessing the emergence of multiple technologies that are transforming the global financial landscape. The phenomenon most familiar to us, of course, is marketplace lending, but another area of development with the potential for great impact involves bitcoin and other blockchain-related technologies. Nearly one year ago, we analyzed data from the API of BTCJam, a loan originator that is using Bitcoin to make cross-border loans online. Today, we will explore how BTCJam, as well as BitBond, another bitcoin-powered lender, are using cryptographic currency to bring further innovation to online lending.
Cryptographic currencies such as bitcoin offer the potential for a monetary system not controlled by central banks or governments, as well as the promise of decreased transaction costs and simplified cross-border commerce. –Orchard Blog, July 28 2014
For BTCJam, we used a dataset of available listings downloaded from the BTCjam API on May 25, 2015. For BitBond, we used a CSV file containing the platform’s entire loan history, downloadable from their website. For Bitcoin exchange rates, we used the Coinbase API.
Exchange Rate Risk and Currency Pegging
Over the past several years, the price of bitcoin in dollars has been extremely volatile, meaning that a bitcoin-denominated loan would expose an investor not only to the credit risk of the borrower but also to the exchange-rate risk of bitcoin itself. As we can see from the graph below, this risk is very real, with the USD/Bitcoin exchange rate having fallen significantly over the past 2 years.
Fortunately, BTCJam and Bitbond both offer loans that are pegged to a non-bitcoin currency, enabling borrowers and lenders to elect to use bitcoin solely as a medium of exchange rather than a store of value. An excerpt from our earlier post explains the 2 types of loans:
- “Bitcoin loans” are made in BTC and repaid in BTC. Both borrower and investor are exposed to changes in the value of bitcoin. Investors who predict that bitcoin will rise in value would expect to benefit from funding these loans. Borrowers who predict that bitcoin will decrease in value would theoretically benefit from borrowing under this structure, particularly if they receive their income in a fiat (i.e. government-issued) currency.
- “Linked loans” are made and repaid in BTC but are indexed to the bitcoin-fiat exchange rate on the date of loan origination. For example, if a loan is made for a sum of bitcoin equal in value to $5,000, the payments on the loan will be based on the $5,000 initial value, regardless of any change in the value of bitcoin. In this way, bitcoin serves only as the medium of exchange, and both borrower and investor are insulated from the exchange-rate risk.
Since our last post, BTCJam has introduced linked loans in five new currencies: The Brazilian Real, Mexican Peso, Russian Ruble, Indian Rupee, and Euro. Not only does this allow borrowers to obtain loans in their native currency. It also allows investors to invest in loans in any currency offered on the platform, even if they do not have a physical presence nor bank account in the country where that currency is issued. For example, I was able to invest in a loan denominated in Brazilian Real, even though I have neither a personal Brazilian financial presence nor any bank account in that currency.
The graph below shows the current availability of loan listings on BTCJam by borrower location and currency.
BitBond also offers both bitcoin-native as well as currency-pegged loans. While their CSV file does not offer the historical breakdown of these categories, it does allow us to explore the geographic origin of their borrower population, which we display in the graph below.
Reputation & Refinancing Loans
Another opportunity offered by non-traditional lenders such as BTCJam and BitBond is the ability to use a borrower’s online reputation as a way of verifying identity and establishing confidence in propensity to repay.
BTCJam, for instance, uses a borrower’s facebook friend count and ebay reputation score and makes these values available to investors.
BitBond establishes a borrower’s identity by checking for connections to Facebook, Linkedin, Twitter, PayPal, and Ebay.
As borrowers connect more of their online accounts, the reliability of their identity increases, and often, they are able to obtain loans at lower interest rates as a result. BTCJam has recently introduced intra-platform refinancing as a way to capitalize on this. Borrowers with an existing loan can apply for an additional loan at a lower rate, which is immediately used to repay the previous.
As marketplace lending and the blockchain each makes its own impact on the financial landscape, we expect to see further innovation from those who might use both technologies in concert. Each of the aforementioned platforms is growing, with BTCJam now having made over 48,000 BTC worth of loans and BitBond recently announcing a funding round that will be used to grow its platform. There is much to explore in the realm of how cryptographic currencies will impact marketplace lending, including the areas of secondary trading, cross-border transactions, and potential derivative products. We look forward to exploring these topics in future posts.